The impact of state intervention and bankruptcy authorization laws on local government deficits

Lang Yang ()
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Lang Yang: George Washington University

Economics of Governance, 2019, vol. 20, issue 4, No 1, 305-328

Abstract: Abstract Local governments in the United States can file for bankruptcy to restructure their debt if allowed by state laws. While some states legislate an unconditional authorization, others conditionally permit local filings, do not give authorization, or intervene in local crises. This paper investigates the impact of state policy adoption on local governments’ revenue to expense ratio, a measure of deficit. While bankruptcy authorizations do not show an impact at the mean, a median locality decreases the revenue–expense ratio after the state adopts an authorization unconditional on state intervention, suggesting a moral hazard effect. Localities with conditionally high deficits, however, increase the ratio upon the adoption of a conditional authorization, possibly because they want to avoid being subjective to conditions placed by states.

Keywords: Fiscal rules; Fiscal federalism; Municipal bankruptcy; Fiscal sustainability (search for similar items in EconPapers)
JEL-codes: D82 H71 H74 H77 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s10101-019-00222-6

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